Posts Tagged ‘activities of daily living’

SEPTEMBER 5, 2011 VOLUME 18 NUMBER 31
Queens (New York) resident Lillian Baral was in her early 90s. She lived at home, but she required full-time assistance with her care. In 2007 she paid two caretakers a total of $49,580 for live-in care (one lived with her for five weeks while the primary caretaker took a vacation). Were the payments deductible on her income tax return?

The short answer, according to the U.S. Tax Court: yes. Not surprisingly, the more complete answer is complicated and depends on the specific facts of Ms. Baral’s case.

Ms. Baral had been diagnosed as suffering from dementia as early as 2004, three years before her long-term care costs became a tax issue. In December, 2006, her physician wrote an evaluation of her then-current mental status. He found her to be confused, unable to communicate clearly and at risk of falling in her home. Because of her memory deficits she would require assistance with the activities of daily living, he wrote. She needed full-time assistance and supervision for medical and safety reasons if she was going to stay at home.

Ms. Baral’s financial affairs were being handled by her brother David, relying on a power of attorney she had signed some time before. He paid all her bills, handled her checking and other accounts, and hired the nursing service to care for her in her home. By the end of 2006, in an effort to save money, he had discharged the nursing service and hired one of their caretakers directly to live with his sister and oversee her care.

Mr. Baral did not, however, remember to file his sister’s income tax returns for 2007. The Internal Revenue Service noticed, and near the end of 2009 they filed a “substitute for return” based on records available to the IRS. The form indicated that her income for 2007 had been $94,229; after including a personal exemption and a standard deduction, the IRS calculated that Ms. Baral owed $17,681 plus interest and penalties.

By the time the IRS sent out its notice, Ms. Baral had died. Her brother had been appointed as personal representative of her estate; he argued that (a) she had not been required to file a tax return at all, and (b) she was entitled to a medical expense deduction for the long-term care costs she had incurred. The IRS disagreed on both scores.

The dispute ultimately found its way to the United States Tax Court, which hears claims and defenses regarding income tax returns (along with other tax-related proceedings). The Tax Court ruled that the key legal question was whether Ms. Baral was a “chronically ill individual.” If she was, then her caretakers’ salaries would be “qualified long-term care services” and therefore deductible. The court noted that there are three ways to identify a “chronically ill individual”:

Was Ms. Baral unable to perform at least two of the six “activities of daily living”? The six ADLs are: eating, toileting, transferring, bathing, dressing, and continence. Although her physician had said that she required assistance with her ADLs, he had not identified which ones — and therefore the court could not determine whether she was deficient as to only one, or as to two or more. She did not meet this standard.

Did Ms. Baral have a level of disability “similar to” the ADL standard? Again, the court found that the physician’s evaluation was not clear.

Did Ms. Baral require substantial supervision to protect her from threats to her health and safety because of “severe cognitive impairment”? Applying this test to Ms. Baral’s condition and circumstances was a little easier for the court. Because her physician had described her as demented, and at risk for falls or failure to take prescribed medication, Ms. Baral met this test.

Fortunately for Ms. Baral’s tax situation, only one of the three standards had to be met. Because of the evaluation by her primary care physician in 2006, the cost of her live-in caretakers would be a legitimate deduction on her income taxes — or at least it would be deductible to the extent that it exceeded 7% of her adjusted gross income.

Ms. Baral’s brother had also argued that he should be able to deduct the $760 paid in 2007 to her physicians (the Tax Court agreed) and the $5,566 she paid to caretakers for reimbursement of expenses they incurred on her behalf. The Tax Court denied the deduction for reimbursement, since there was no evidence that the payments were for medical items. If Mr. Baral had been able to show that they were, for example, co-payments on prescription medications, or over-the-counter medications at the direction of her physician, or medical supplies, they would have also been deductible. Estate of Baral v. Commissioner, July 5, 2011.

What does Ms. Baral’s case tell us about tax issues surrounding home care? Several things:

Keep good receipts. To the extent possible, segregate clearly deductible expenses from questionable or non-deductible expenses, and make sure the purchases are identifiable.

Get a good doctor’s letter. Ask the attending physician for a letter that specifically addresses ADLs, the need for caretakers to protect the patient’s safety AND a general description of limitations on the patient’s abilities.

If you are in charge of the patient’s finances, file their income tax returns. Someone with $95,000 of income — even if much of it is Social Security and pension income — is almost certainly going to need to file a return. Mr. Baral would have had a much easier time if he had filed the return claiming the deductions, rather than having to argue about the IRS’s “substitute for return” after the fact. Note that the IRS action was delayed, too — it can be that much harder to prove the taxpayer’s condition two (or three, or four) years after the fact, and it is not uncommon to be addressing these issues after the taxpayer’s death.

North Hollywood, California, elder law attorney Stuart Zimring knows what his clients want. “In my Elder Law practice,” he writes, “I have found that when I ask my clients (or their families) what they want more than anything, the answer is frequently ‘I want to stay at home. I don’t want to have to go to a nursing home or other kind of facility.’” Elder Law Issues asked Zimring, a nationally recognized authority on placement concerns, to provide some guidance for our subscribers and readers. Here is what Zimring wrote:

“Our senior population is fiercely independent and self-reliant. They (and we, their children, the baby boomers who will be ‘them’ in not too many years) value independence, the ability to go and do what we want when we want.

“But reality can impose boundaries on this independence. Whether it is physical limitations such as arthritis that make it difficult to grasp or manipulate cooking utensils, mental limitations such as short term memory lapses that cause us to forget that we were putting up a pot of tea, the reality of the aging process makes it desirable, if not imperative, for many of us to obtain assistance at home if we are going to continue to age in place.

“But where can we find this assistance? How do we make sure the persons we choose are honest and capable? What are our obligations to them as employers? How do we pay for these services?

What Kind of Help Do You Need?

“The threshold question before looking for assistance is to determine exactly what kind of assistance is required. It may ‘only’ be housekeeping once or twice a week. Or meal preparation once a day. Or transportation. Or companionship. Seniors with more serious needs may need assistance with some (but not all) of the ‘activities of daily living’ such as bathing, dressing, toileting, eating, medicating and/or ambulating. Obviously, someone who requires assistance with most of these ‘ADLs’ requires a significantly higher level of care than someone who just needs help keeping the house clean.

“The point here is that the senior (and her family) may not be in a position to objectively assess what services are necessary. Thus, the first step may be to retain the services of an experienced Geriatric Care Manager to do an assessment and recommendation of what is required. Various local aging organizations provide these services. They can be located through the state agency responsible for aging issues [in Arizona, the Department of Economic Security’s Aging and Adult Administration, at www.de.state.az.us/links/aaa/]. Also, the National Geriatric Care Managers Association website (www.caremanager.org) can be used to locate professionals in the area.

“Once the level of assistance has been ascertained, the next step is to locate the right person. Simply put, there are two ways to do this: Work through an agency, or employ the person yourself. There are pros and cons to both approaches.

“Again, to put it simply, there are two kinds of agencies that can be utilized. The first, an ‘employment’ agency, will generally pre-screen candidates, acting as an initial filter for you. Some are better than others. With respect to services to the senior population, some social service agencies perform services like this (in the Los Angeles area, Jewish Family Service of Los Angeles has its A+ Total Care division which screens prospective aides, gives them some training on an ongoing basis, and then matches its people to meet the senior’s criteria). Domestic agencies may do minimal training and screening, but basically they are simply going to refer a number of potential candidates to the senior, leaving the hiring decision to the senior or her family. These agencies charge a fee for their service, usually calculated as a percentage of the salary of the employee.

“The other kind of agency actually furnishes the aide. He or she is an employee of the agency. The hiring process is similar, in that a number of candidates will be sent out for interviews and the senior allowed to choose the one she wants. However, in this scenario the aide remains an employee of the agency rather than of the senior.

How to Find Assistance

“Another source is ‘word of mouth.’ It is trite but often true that everyone ‘knows someone.’ It pays to talk to friends in the community, church or synagogue members, senior center participants and other social groups. Unfortunately, as we move through this continuum called ‘aging’ our needs change. Someone’s father may now be in a nursing home and the aide who assisted him at home for several years may now be looking for work. These kinds of referrals (whether they are of individuals or agencies) are often the best.

“Speaking of referrals: always, always, always get references and do not hesitate to talk to all of them!

“One of the most frequently asked questions is ‘should I hire the aide myself or pay the agency?’ The simple answer in my opinion is that if it is economically feasible, let the agency be the employer. It is more expensive (some-times a little, sometimes a lot) but there are a number of advantages. The biggest advantage: if the aide doesn’t show up for work, it is the agency’s responsibility, not yours, to see that someone is there. Taxes, worker’s compensation insurance, all the minutiae of being an employer are someone else’s problem. But one generally pays for this luxury.

“Unfortunately, there is very little government assistance in most states for non-skilled or custodial care. Medicare will provide some home health assistance in certain circumstances on an intermittent, non-recurring basis, but not full time. Medicaid assistance [managed in Arizona by ALTCS—the Arizona Long Term Care System] may be available for services related to ‘activities of daily living,’ or ADLs, but again on a limited basis. However, this kind of assistance, usually referred to as Home and Community Based Services (HCBS) or In Home Supportive Services (IHSS), is usually limited to low income families such as those receiving SSI and, unfortunately, may provide only minimal financial assistance at best. The Department of Veterans Affairs provides a range of home health benefits for eligible veterans, especially those who are combat veterans and who are disabled (whether or not the disability is service related).

“Older long term care insurance policies (the first generation of ‘nursing home’ policies) generally did not provide any residential care benefits. However, today’s policies frequently include various kinds of in-home benefits such as respite care, homemaker services, adult day care coverage and the like. Benefits are usually tied to the number of ADLs that are adversely impacted.

“When looking into the availability of governmental or insurance benefits, the senior and/or her family should never assume that benefits are not available. It is always better to ask, apply for benefits and then, if denied, ask ‘why?’ Where appropriate, an elder law attorney should be consulted. It may well be that when pushed, the local agency or insurance carrier may reconsider its initial denial.

“The specter of losing one’s independence is frightening and depressing. Effectively utilizing aides and assistance can facilitate our aging in place, maintaining our independence and dignity. The costs involved (including the cost of competent legal advice) are usually a small price to pay.”

Mr. Zimring’s advice and suggestions are entirely relevant to securing and monitoring home care outside his own Los Angeles, California, area. Elder Law Issues thanks Mr. Zimring for sharing his expertise with our readers in Arizona, California and around the country.

Many political and public policy analysts argue that an important component of the funding for long term care in the future will be the private insurance industry. The cost of long term care continues to rise, and the share of the federal budget devoted to such care is expected to increase dramatically in the next few decades.

In order for insurance to be an effective tool for payment of long term care costs, purchasers will need to begin buying policies in larger numbers and at younger ages. Currently, long term care insurance pays for a tiny fraction of the total cost of care.

A new study published by the Agency for Health Care Policy and Research brings the need for younger customers to purchase long term care policies into stark relief. The study considered whether current insurance underwriting practices permitted substantial numbers of seniors to acquire such policies.

According to the study, 65-year-olds should expect to be rejected for long term care insurance between 12% and 23% of the time. At age 75, the rejection rate rises to between 20% and 31%. In other words, at least one out of ten concerned seniors who wait to purchase long term care insurance will find that they are unable to secure coverage at any price.

The study assumed that insurance companies would apply their current underwriting policies to all applicants, even if the pool of potential customers were to increase dramatically. Specifically, the study found that an applicant would be unable to purchase a policy if he or she was already in a nursing home, or if he or she suffered from cognitive impairments (such as Alzheimer’s Disease), cancer, cirrhosis, diabetes, chronic obstructive pulmonary disease or other major illness. Those applicants who were unable to perform activities of daily living, regardless of the cause of their disability, were also found to be uninsurable under present standards.

While it begins to be difficult to purchase long term care insurance at age 65, that is precisely the age group currently buying policies. As Elder Law Issues reported last February, a recent study by the Health Insurance Association of America found that half of new long term care policy purchasers are over age 70, and only one in five of those over age 55 even consider long term care insurance.

When Can You …

Some important ages for seniors to know:

55–You can withdraw funds from IRAs, 401(k)s, Keoghs, SEPs and other retirement plans without paying the 10% tax penalty if you retire, quit or are fired.

59½–You can withdraw funds from retirement plans without the tax penalty in any event.

60–You are eligible for Social Security benefits if you are a widow or widower.

62–You are eligible for early retirement (at a reduced rate) for Social Security; many private pension plans permit retirement.

65–You are eligible to retire with full Social Security benefits. You are eligible for Medicare. Most private pension plans provide full benefits. (Note, however, that the age for full Social Security retirement will increase gradually to 67 over the next quarter century; Medicare’s eligibility age is likely to change as well, though it is not presently scheduled to do so.)

70–You can receive full Social Security benefits regardless of how much you earn from employment. Until this age, your benefits are reduced if you have earned income over certain threshold amounts.

70½–You must begin withdrawing money from your IRA or other tax-deferred savings plan. The minimum required withdrawal is calculated by dividing the present value of your IRA by your life expectancy, taken from IRS actuarial tables.

Almost half of those reaching age 65 in any given year are expected to spend at least some time in a nursing home during the last years of their lives. With nursing home costs in Arizona averaging as much as $35,000 to $40,000 per year, few can afford sustained long term care costs. Medicaid, the federal program which has paid those costs for most patients, is likely to be extensively revamped (and curtailed) in this budget year.

All of that is the rationale for a tremendous growth in sales of long-term care insurance in recent years. While millions of Americans have purchased policies since they became widely available a decade ago, many are uncertain of the value of those policies.

In a rapidly-developing industry, the only completely predictable element is change. The most recent innovation is development of a long term care policy based on life insurance. With such a policy, the purchaser who never enters a nursing home will have left a substantial payment to beneficiaries at death, while providing coverage in the event that nursing home placement becomes necessary.

The principal drawback to life-insurance-based long term care policies is cost. Since the policy also includes a death benefit, it stands to reason that the expense will be higher.

Purchasers of long term care insurance (whether or not they are considering one of the new kinds of policies) should be alert to common shopping pitfalls:

Length of coverage–current Medicaid rules impose a three-year penalty on asset transfers by the applicant. If the purpose of insurance is to permit transfer of assets (to children, for example), then coverage should extend for more than the three-year period. Given upcoming changes and a desire for flexibility, the prudent purchaser should opt for five years of coverage.

Home care–any good policy should provide coverage for assistance in the home. One item to look out for: “Activities of Daily Living” should include ability to bathe oneself. Otherwise, someone with limited deficits may need assistance but fail to qualify for in-home help.

Inflation protection–nursing home care costs tend to increase faster than inflation. Some policies permit periodic purchase of increased protection. Some life-insurance based products rely on increased policy value to make up future differences between cost and benefit.

Elderly Suicide Rate Increases

The suicide rate among elderly Americans is rising after decades of decline. That’s the conclusion of a federal study released last week that cites depression, alcohol abuse, social isolation and physical illness as leading risk factors.

The Centers for Disease Control and Prevention said the suicide rate for those 65 and older increased by nine percent between 1980 and 1992. The suicide rate for the elderly had declined from the 1940s until 1980, when it began to increase, the CDC said. The biggest suicide rate increase occurred among the 80-to-84 age bracket, while the rate declined among adults aged 65 to 74.

Half of all Americans who turn 65 this year are expected to spend some time in a nursing home. One percent of all Americans aged 65 to 74 reside in nursing facilities, and the proportion increases to seven percent of those 75 to 84, and twenty percent of those over 85.

Payment for Nursing Home

Almost half of those nursing home residents are paying for their long-term care from some combination of savings, family contributions and private insurance; most of the balance are paid for or subsidized by Medicaid, Medicare or other federal and state programs.

There is a tremendous market for insurance which could provide for the long-term care needs of such a large (and growing) population. The long-term care insurance industry has grown dramatically in recent years as a direct result.

What to Look For

When purchasing long-term care insurance, it is important to look for a number of benefit options:

Daily benefit rates. An inadequate rate will not provide sufficient coverage, and may make the patient ineligible for government assistance.

Home care. Policies with some home care provisions may permit the patient to remain at home longer.

“ADLs”. A policy should provide coverage when you are unable to perform a certain number of the “activities of daily living.”

Rating. Be sure the insurance company is likely to be around longer than you are.

The American Association of Retired Persons (AARP) offers a free brochure for prospective long-term care insurance buyers. “Before you buy: A guide to long-term care insurance” is available by writing to AARP Fulfillment, 601 E Street NW, Washington, D.C. 20049.

Elders Prefer Home

According to an article in the Wall Street Journal of November 16, 1993, the 1980s boom in construction of seniors housing developments may have misjudged the market. The article cites the results of a poll conducted by the American Seniors Housing Association as showing that elderly homeowners prefer to remain in their homes until death of a spouse, serious illness or frailty requires a move.

As a result, seniors housing tends to have older and frailer residents than expected, and many facilities have added emergency-response services (96%), housekeeping (85%) and nursing care (63%). The average senior housing resident is 82 years old, and three-quarters of residents are women.